Russia in the WTO

Summary: Almost two decades after negotiations began Russia is set to join the World Trade Organization. Russia, the biggest country to enter the WTO since China joined ten years ago, is expected to be confirmed as a member during the ministerial meeting in mid-December.

Almost two decades after negotiations began Russia is set to join the World Trade Organization. Russia, the biggest country to enter the WTO since China joined ten years ago, is expected to be confirmed as a member during the ministerial meeting in mid-December.

In a Q&A, Sergei Aleksashenko, former deputy minister of finance of the Russian Federation and former deputy governor of the Russian central bank, looks at what WTO accession will mean for the Russian economy and global trade, and assesses the dispute with Georgia, the last sticking point that Russia had to overcome before joining the WTO.

What has been the process for Russia’s accession to the WTO? Why did it take so long?

The accession talks took a very long time, over eighteen years. The negotiations were carried out by various groups of negotiators and under various governments, and the Russian delegation never really had a common accession strategy.

There are two main explanations for this. First, in 1998, we had a political crisis in the middle of the negotiation process that was followed by a change in regime. Second, there is no stable consensus among the general public or in the business community in Russia on whether the country will really benefit from joining the WTO. My purely intuitive assessments suggest that 10 percent of Russian businesspeople think the country should join, 10 percent are opposed, and 80 percent neither care nor understand what the whole thing is about anyway. Moscow did not apply any pressure to speed up the process.

At the same time, throughout the negotiation process, the United States repeatedly raised its demands on Russia, which irritated the Russian authorities, especially under Vladimir Putin’s tenure as president and prime minister. There were moments when Putin simply froze the talks, annoyed by the constant stream of new conditions.

But in the end, the political establishment, in particular the part of the government focused on economics, agreed that Russia needed to join the WTO, and they were able to somehow convince Putin to give it the go-ahead. And once that happened, the talks moved quite quickly.

Many measures agreed on during the negotiations have already been introduced by Russia. And in some instances, blindly following the WTO agreements will mean that Russia has to take a step backward. For example, the Russian government abolished payment of customs duties on planes under eighteen years old, while the WTO accession conditions set a customs duty at 7.5 percent for these aircraft. If Russia followed the WTO rules to the letter, it would have to introduce customs duties, raising them from 0 percent to 7.5 percent. Of course no one is going to do this.

How will Russia’s admission to the WTO impact the country? Which sectors of the economy will be most affected?

Russia’s accession to the WTO will not have any substantial impact on its economic landscape. During the long and arduous negotiations, Russia worked through the vast number of technical details concerning changes to its customs duties on commodities, yet in large part these measures have already been implemented and others will soon be. What’s more, the overall accession program does not entail structural changes and decisions that will significantly alter the economic situation in Russia.

That stands in contrast to China. When Beijing joined the WTO, the terms that were agreed upon effectively amounted to a program for an opening-up of the Chinese economy and the reforms it needed to make over the following decade.

Going forward, import duties on many items will fall as a result of WTO accession. In theory, this suggests that imported goods could become a little cheaper. At the same time, the greater openness and liberalization in foreign trade that comes along with WTO membership will mean slightly stiffer competition from imported goods on the Russian market, which will benefit consumers.

Metals and chemicals exporters will gain some marginal advantages because these two industries produce processed goods, and the WTO is an organization that regulates export tariffs only on such commodities, not raw materials. Under WTO regulations, the tariffs will be lowered for commodities exporters. This could represent sizable sums for particular businesses. But on a national scale, the boost would be only a negligible figure.

And what about the banking sector?

As far as I know, no substantial changes are in store for the banking sector. The Russian government limits Western banks to opening only subsidiaries in Russia—they cannot directly open their own affiliates. With WTO accession, Russia has managed to successfully defend these regulations. The latest crisis has shown that this is the correct decision, enabling Russia to carry out proper banking supervision and to regulate the banking system.

In the early 2000s, there were lively discussions about foreign banks’ share in the charter capital of banks within the Russian system, that is, the amount of money brought together by owners to form a bank. In the 1990s, foreigners were restricted to a share of no more than 12 percent of a banking system’s charter capital. This share was raised to 25 percent during the WTO negotiations, but this is not something that will make foreign banks’ situations easier or harder.

The foreign banks that want to operate in Russia are already here, and there were no particular restrictions placed on their arrival. Banks such as Unicredit, Citibank, Raiffeisen, and Rosbank, which now belongs to Societe Generale, are among the top fifteen banks in Russia and are developing quite fast.

Will Russia’s automobile industry survive?

Russia’s automotive industry is comprised of two parts today. You have the assembling enterprises of foreign automobile manufacturers. They will survive because this is in the interest of their parent companies. They want to continue selling cars on the Russian market and find it more profitable today to assemble them in Russia. This is especially true since, at the very last stage of negotiations, they managed to obtain significant allowances from the Russian authorities.

Then there are the two Russian carmakers inherited from the Soviet economy—Avtovaz and GAZ. I am confident that Avtovaz will survive and will hold its ground against the competition. It recently underwent massive refinancing and industrial upgrades—the government has put a lot of money into improving the company’s financial health, and the new management, new shareholders from Renault, and the active cooperation with Renault-Nissan has helped the company fix its production problems, dramatically reducing the number of rejects and developing new models. Avtovaz is also now carrying out an investment program to increase its production capacity by 50 percent. If the company’s main shareholder, Renault, is moving forward with this program to increase capacity, it is clearly optimistic about the future.

As for GAZ, it still has not yet put together a clear development strategy, but it has a shareholder with extensive financial resources—Oleg Deripaska, the head of the investment group Basic Element. He has been fighting for the company’s future for eight years, and I think he will be willing to spend more money yet to keep the business afloat.

What is the current state of the Russian agricultural sector? How will WTO accession affect agriculture?

State authorities have put a lot of money into Russia’s agricultural sector, and it has been growing steadily over the last ten years. At the same time, changes are taking place. Clear differentiation is emerging in the sector between people who want to work and earn money and people who do not want to make the effort.

Those who want to work and earn are succeeding. Pork and poultry production, for example, is growing by 20 to 30 percent a year, which is a sign that the sector is in a buoyant mood. And over the last decade, Russia has become one of the world’s biggest grain exporters, which shows that grain and wheat production are also doing well.

Of course, Russian winters are long and snowy, and most of the country is cold. This climate makes agriculture as a whole a risky undertaking. Russia will never have the conditions necessary for growing fresh vegetables as efficiently as, for instance, Turkey. So Russian agriculture will never find it easy to be competitive in this segment. And historically, Russia has faced difficulties in cattle farming as well. Without effective managers or many effective farms, there are still challenges to overcome.

Russia defended its right to protect its agricultural sector during the WTO negotiations. The level of protection is lower than what the Russian government had wanted, but the Russian agribusiness sector is largely satisfied with the agreement and is not attempting to block it.

Those working in Russian agriculture realize that competition will increase as a result of accession, but they do not fear this prospect because they still have advantages on the local market, after all. They know its particularities. And there are many products that will not be profitable to import. Prices for basic foodstuffs, such as milk, grain, sunflower oil, and sugar, are completely tied to world price levels, and the businesses importing the goods would have to pay the costs of transportation. In other words, no one would dream of importing grain from Canada to Russia in order to compete on the Russian market.

Do you agree that accession will benefit Russia? What are the pros and cons for joining?

The main winner from Russia’s accession will be the Russian population, but I do not think the benefits will be fantastic. For example, most people in Russia do not buy imported cars, or any cars for that matter, so the fact that import duties on cars will drop will of course have no impact on their lives. But then, some people buy cars every year, so decreased import duties (which will take seven years to implement) will have an impact on their lives. Every year they will see cars becoming cheaper.

Yet, accession will not make everyone happy. Joining the WTO will not eradicate corruption-related problems, make the court system more effective, improve property rights protection, or relieve some bureaucratic pressure. Imagine you are selling a good product and I am selling a shoddy product, but I have a connection to the regional governor or the mayor. This “protection” or “administrative resource” is called krysha and may even one day make its way into other languages just like “troika,” “vodka,” and “sputnik” have. If I use my krysha to squeeze you out of the market, by, say, getting the fire safety inspectors to pay you a visit every day, whom you will have to pay bribes in order to stop them from closing your company, you will end up going out of business sooner or later despite selling a product of higher quality than mine. There are thus many noneconomic—I would even call them political—problems that affect the competitive environment in Russia, and which WTO accession cannot fix.

Did Russia have to make concessions to get into the WTO? What kind of concessions? The dispute with current WTO member Georgia was a major sticking point during negotiations. How has it been resolved?

Joining the WTO involves concessions for any country, usually the adoption of particular rules or restrictions that bring the country in line with world standards or standards advantageous to those already in the WTO. Russia made concessions on a very large number of issues. I don’t think anyone has a complete list of all of these items and agreements yet—not even the negotiators themselves. Bits and pieces have appeared in the newspapers, but it is impossible to analyze it all at this point.

Georgia originally threatened to veto Russian accession if Georgian customs officers were not allowed to monitor all goods traveling between Russia and the breakaway provinces of South Ossetia and Abkhazia. Tbilisi eventually dropped that condition, and both Russia and Georgia finally agreed to a compromise solution. Under the agreement, a Swiss commercial company hired by the Swiss government will supervise the traffic of goods across what was formerly the Russian-Georgian border and is now the demarcation line between South and North Ossetia.

How will Russia’s accession affect other countries, in particular the United States and the eurozone?

The United States will have to repeal the Jackson-Vanik amendment, which is a holdover from the Cold War that prohibited America from establishing normal trade relations with the Soviet Union because it did not comply with free emigration policies. The law is still applied to Russia and other former Soviet states. A repeal is clearly in Russia’s advantage. If the United States does not do away with the law, either before or after Russia joins the WTO, Moscow will be under no obligation to fulfill the commitments it signed during the accession talks with regard to U.S. goods.

In purely economic terms the United States gains nothing from the Jackson-Vanik amendment today. It simply deals a blow to the Russian authorities’ image and prestige. It does not hurt U.S. authorities, however, since most Americans do not even know the amendment exists, let alone what it means in practice.

Will Russia’s accession help it cope with the financial crisis?

If a new financial crisis begins in Russia, the effects of WTO membership will not help to fight it any more than would, say, the arrival of summer. The Russian economy will not change fundamentally after joining the WTO and structural reforms will not be made. This means that the economy will not become any more stable and Russia’s dependence on oil will not be reduced. If the crisis comes, the Russian economy’s stability will not be helped by its accession to the WTO in any substantial way.

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